Unknown Advisor

The Unknown Advisor is an investment advisory representative for a registered investment advisor in Florida. This blog is not about selling. It's about general investment information, about what has worked, over time in investing. Asset allocation, for example, has worked. Because certain things have worked, they are likely to work in the future. Feel free to email me questions.

Friday, March 30, 2007

TCS: "Unearned Wealth"

Great article over at TCS, linked below. It's a great discussion-starter.

One of the fascinating things (to me, at least,) is how, when people strive for great wealth, and get it, then often they just blow it, or it ruins lives. Frequently in financial planning circles, advisers, in looking to be maximally helpful, develop expertise in helping with benevolence. wealthy folks are big targets, and often have big hearts. Generational issues can be terribly worrisome. As the linked TCS article notes, money can kill you if you don't know how to handle it. How many pro athletes, celebrities, heirs to fortunes, have "had it made", and then lost it, or even become destitute? Too many. Short careers, no knowledge at all of how to manage the money, poverty in childhood, alcohol, drugs. Money, it can own you. People come at you from every direction. It's sometimes not like we might think. money is a fine servant, and a terrible boss. Life is not about money, though it is good to have some. It is an excellent thing to know "how to abound", and how to use wealth to make real differences in lives. Good counsel, not just legal, can make a difference in the experience of wealth.

Very Interesting Bloomberg Piece on Dimensional Fund Advisors -- DFA

Not enough is written about DFA. "D" does not stand for "different", but it really could. Nobody else is quite like them. Their approach is quite intriguing. Nope, I'm not a DFA advisor. To this point.

Bloomberg's Hauck & Xydias Discuss Low Global Correlations

This is important to you because when many global financial markets seem to be moving more closely together, investors and speculators both take note. We respond, or at least are concerned, in somewhat different ways. The diversification of foreign investing is important to each, but globally-diversified investors don't necessarily need to respond in a short-term-focused way. There are times when correlations track along more closely, like now, and there are periods when markets in different places move up or down together, but in differing degrees, and there are times when the correlations even become negative for a time. This can continue for extended periods of time. No sweat, to a more strategically-oriented investor. More tactically-oriented folks, and the speculatively-inclined, like those described in the Bloomberg article, always on the lookout for a way to shorter-term gains, can get somewhat lathered up over this, but that is the way things are, for now, and perhaps for awhile.

More on China's Banks, including comment by Mark Mobius -- Bloomberg

It's business as you would expect in developing market economies. knowing what it's like should be part of how you allocate foreign investments, just about however you approach constructing your own portfolio. Generally, you should be careful. Hold down the amount of your money which you so invest to a reasonable level.

MarketWatch's Chuck Jaffe: "Hold everything - here's how your banker lives off the float even if you can't."

Yes, it is rather outrageous. You've written the check, the money's gone from your account, but it's not there at your payee yet. Overnight interest rates being the way they are, don't look for much improvement. Funny how a pretty evenly balanced Congress gave relief to the financial intermediaries, and left us voters out twisting in the wind. It is typical behavior for a financial services industry which has a lot of clout. A lot of clout. On a similar note, how about the electronic, online bank payment you make, when the money is gone that day from your account, but the payee needs two business days (plus perhaps a weekend) to "process" the payment? Sweet, for them.

Your obligation is to know what's going on. You may not be able to do much about it, but you have a better chance to cope, if you stay tuned-in on the discussion. Time really is money.

WSJ: Hedge Funds Vote (Often)

I've linked to the intro, the full story is subscription-only. I blogged on this awhile back, and I hope that significant reform is achieved. In the print edition, the story is on page C1. The SEC is said to be in a "may act" mode. When hedge funds borrow shares for the purpose of voting on issues which can have short-term effects on share prices, be certain that they have no one's interests at heart but their own. "It's called "empty voting", and from here looks like a fundamentally corrupt practice. I'd say, "ban it." But then, I'd probably say "ban hedge funds" also. As has been said, they are not a new way to invest, they are a new way to enrich fund managers.

A Little Market Comment

Well, by now it seems as if we've seen a little of everything this year. Quiet upward movement, large one-day drops, movement back up. What next? There are plenty of pundits who have been predicting everything from a "Very nice, very nice, fifteen percent gain in the broad market by the end of the year, so buy my mutual fund to get in on it!" to the guys who say, "The end is near! Buy my newsletter to save yourself!"

They don't know what the market will do. They really don't. And that's just fine.

You do well as an investor, and can reasonably hope to do fine over time, by ceasing to play the pundits' "loser's game". Educate yourself on what really has worked in investing, or get yourself a low-fee, trustworthy advisor. I've talked about evaluating advisers, to find the ones who are good fiduciaries, before.

Tuesday, March 20, 2007

Barry Barnitz' Financial Page blog: Hidden Fees in 401(k) Plans

Barry tells you what the issue is succinctly. Follow the link to read, or at least skim the underlying paper. 'Gird up your loins' if you aren't into reading technical financial discussions. But if you have a 401(k), and if you need it to work well for you, it's a major part of your future financial well-being.Start now, by at least looking over the paper.

I've advised people on subfund choices and allocation for their 401(k)s, and from this advisor's perspective, some are so much better, and some are so "less better". It's your retirement, and good advisors and smart clients have to find ways to make these things work optimally, as imperfect as they are, in short, make them work as well for you as they have for the financial services industry.

So, what do you do right now, with your plan as it is now, whether good or not so good? You learn. Learn about the disclosed and the undisclosed fees, at least well enough to know what a 12b-1 fee is, and to get the concept that these things are not neatly itemized for you in anything your plan provider sends you. Shock your 401(k) contact person by asking for the prospectus(es) for your fund choices. Get it. Gird up your loins again and read the thing. Go to the notes if you have to, to get the specifics, and get them correctly. You could politely email the people in your company who make decisions about the 401(k) provider. You might politely let them know if you think the fund choices are not great. Ask them, 'What is a fiduciary doing paying out 12b-1 fees, anyway?' Not all plan providers work that way. If there are no low-cost index funds, ask 'why the heck not?' If there is an index fund or two, but the expense ratio is higher than any index fund you ever saw, ask (in a nicer way) why they gave you such a crappy choice. You also do not need six or seven essentially identical (say, US large-cap growth) funds. You need one excellent fund, with low expenses, in major asset classes. You don't need "bear market" funds, internet funds, technology funds, long-duration or high-yield (junk) bond funds (uncompensated risk, per the academics,) or annuity choices (high fees and crappy performance--read the paper Barry links to.)

If you don't want to do such things, you might get a low-fee advisor who knows what the word "fiduciary" means, and cares enough to try to be a good one! Ask how the advisor has structured his business to be a good fiduciary. It's hard to stump financial services types, but that might do it! If you find one, he or she can help some with that 401(k).

The recurrent theme is not one of strength: it is of problems, problems, and more problems. Problems in Japan's banks, in China's banks, and in India's banking industry. They certainly can manufacture. And they can build. They believe in work. Can they run their banks? Will they allow non-performers to fail? They are not exactly awesome engines of economic growth. Whatever our problems, and we have plenty, that is not one of the biggies. I guess it comes with being a "developed" country with relatively less central planning. It is perhaps one of the starkest economic contrasts between East and West, and may have a great impact on how well the 21st century will play out for Asia. Will the promise of the East's most important countries be fulfilled? If it is fulfilled, how wild will the volatility be along the way?

That is why this is significant to investors. We are, as a group, putting more of our money into foreign developed and emerging markets than we have in the past. We are looking for diversification of returns, and for ways to hitch our wagons to high-growth economies. A bumpy ride is OK, even expected, but we watch intently for clues to how bumpy it will get.

What do You Think of the Dow Theory? What do the Researchers Think?

For those who are into the Dow Theory version of technical analysis, Mark Hulbert at MarketWatch has a bit of a review, which I've linked to below, including the interesting note that the three Dow Theory newsletters do not agree on what it says about the present state of the market and the outlook. two are bullish, and the third is bearish. Now stop and think on that for a moment.

Hmmm. Academic researchers pretty much "busted" the Dow Theory decades and decades ago. Mark does refer to one Journal of Finance article all the way back in 1998 which argues for its validity. I don't know if anyone other than the authors was convinced! The Dow theory, like technical analysis generally, has pretty much been in the academic dumper for a generation now. When you test it, it consistently fails to succeed any more often than dart-throwing at the Wall Street Journal.

So, why do people cling to ideas after they are tried in the crucible of research and found to fail? Is it a matter of human nature? Of needing something on which to base decisions? Two things are definitely true. First, the folks who sell newsletters have a conflict of interest. They make a lot of money selling those newsletters. Second, Wall Street's brokerages like clients who trade a lot, be they big hedge funds or little guys investing on their own with newsletter in hand. They have a conflict also. Trading is money, commissions and/or spreads (discounts or premiums, technically,) on crossing transactions to them. Applying a technical analysis-based approach requires a lot of trading, generally. Being as gentle about this as possible, they are self-interested, and the consequences of conceding the failure of technical analysis would be somewhat difficult, particularly for the newsletter writers.

Also, what do you base investment decisions on, if this old, once-popular approach is not really any good? I have advocated in this blog a globally-diversified, multiple asset class approach, using indexed vehicles at least as the default choice. This approach has excellent research support. Well, you may ask, it this idea is so good, why isn't everybody doing it?

Mr. Roger Gibson wrote one of the most remarkable books on investing, primarily for financial advisors, Asset Allocation - Balancing Financial Risk. (3rd. ed., Mcgraw-Hill, 2000.) He writes of what he calls a "quadrant 4 worldview of investing", where the investor, after reviewing what is known about the realities of investing, concludes that neither market timing nor active security selection (stock-picking, for us,) will succeed over time in beating the market. The quadrant 4 worldview is in good accord with the consensus of a mountain of objective financial research. So he writes on the implications of a quadrant 4 view:

"First, a quadrant 4 worldview undercuts to a large degree the reason for the existence of the money management profession." It means that the billions and billions of dollars in fees and expenses investors pay to keep up the lifestyles of the cast of thousands employed in attempts to beat the market are largely wasted. Worse than wasted actually, as what you get for trying to beat the market these ways is that usually you do worse than the market, when all the costs are counted. So, who at your local wirehouse brokerage or online broker is going to tell you that!

They don't even typically talk about that to each other. What newsletter writer is going to want to face that, much less tell you?

The beauty of the "quadrant 4 worldview" is that it lets you, knowing the score, knowing the reality of risk, use market forces rather than fight them. it lets you invest in hope based on what is real! Market returns over time have been good enough to be really worth going after. And wouldn't you, when you think about it expect it to be that way when all is said and done?

Thursday, March 15, 2007

MarketWatch: Working in Retirement

Robert Powell has an article at MarketWatch offering some good thoughts in an interesting article. What if you are underfunded when retirement starts? He says that one in four Americans will not be able to work in retirement, due to health or other issues. Many may be planning to do so. And not enough employers are gearing up to hire or retain older workers.

Working during retirement, to bring in some extra money, to stay busy with your field, to stay interested in life, to feel useful: each is a valid reason for staying employed. Powell notes that there "is also a question as to how ready employers will be to hire and retain older workers." good point. Do you want a robust job market for seniors, like yourself, like your friends? I suggest that you spend your money where you see people who look like yourself! When senior start telling service providers and others you do business with, "I am sorry, but I do not patronize businesses who will not hire a qualified older person", then you will see change.

There are links to great resources in the article, including a study on retirement readiness, weight and retirement, older workers and the workplace. Go see. Think about this if you think you might need to work in retirement.

What do you love doing? Is there a job or self-employment doing what you love?

Wednesday, March 14, 2007

Do I dare to disagree with an Investor's Business Daily Op-ed? "Backdating Bunkum"

Boy, that would require some chutzpah. OK.

(link is below)

IBD: "Since Aug. 29, 2002, companies have been required to report new option grants within two days, which does not leave much opportunity for changing the date. So the alleged 'backdating scandal' — an artifact of capricious changes in tax and accounting regulations between 1992 and 2002 — is ancient history by now."

My reply: Not for the companies restating their earnings, unable to get their 10-Qs out on time, facing lawsuits, and definitely not for the individuals with adverse career consequences or even he prospect of having to defend themselves against criminal charges for falsification of corporate records.

IBD: "Another key myth is that there is something inherently unfair about receiving stock options 'in the money' (priced below some later market price)."

My reply: Priced below the then current price would be more correct! It is wrong. it is unfair. It is in a very real sense theft of corporate value from the other stockholders. For example, I cannot buy Apple or HP or Dell stock at the lowest price of the last month, quarter, or whatever. Neither can you. I couldn't if I was a stockholder either. Pay him his salary. Give him his benefits. Give him a bazillion options. But do it all honestly. Or are all these implicated big-shot executives too poor or inherently too devious to just do it right?

Scott Adams' Dilbert: Wally visits a financial advisor

(link is below.)

And he finds a guy you really should not even think of trusting with your money. I think I foresee some fun with this motif in upcoming days.

Preach it, Scott! Let's see what Wally is offered. First, we have a two percent advisory fee (some are about that high; there are brokers out there with wrap programs in that area. Some advisers are much more reasonable, starting under one percent for the smallest accounts accepted.

Next, "...things that sound good if you don't look into them too closely." Yep.

Now skip almost to the end: "a big front load". On top of an advisory fee. Deplorable. A compliance issue? Don't think that this never happens. I have seen one advisor tacking on a one percent annual advisory fee on top of the big commission he got for selling limited partnerships to people. The same money. An ongoing advisory fee on a heavily-commissioned "investment product" that is illiquid, not even a marketable security.

The crowning glory of it all: Poor Wally is a clueless client. He's not stupid, and he is definitely self-interested. Dilbert readers know that! He just doesn't know. I want you to know. Your future is at stake. Do not be like Wally: Educate yourself. Great clients (for ethical practioners,) or great individual investors study, and read, read, read! You could start with anything you can find by Burton Malkiel, John Bogle, Andrew Tobias, William Bernstein, Charles Ellis, or Larry Swedroe.

Sunday, March 11, 2007

This is Really Good: AFP/Breitbart -- New [computer] techniques help fight old practice of insider trading

Finally! What took so long? It would seem that the publicized application of computer technology to insider trading and the resulting fear of discovery would raise the bar for would-be insider traders. The good guys win when the bad guys are either put out of business or decide the gains might not be worth the risks.

Honest investors and honest reps alike should rejoice, not at the fall of some corrupt people, but that the rewards of investing well, and of helping people invest well both come with a clean conscience.

Saturday, March 10, 2007

Most Important Story of the Day -- MarketWatch: "Without hedge-fund regulation, there will be dark days ahead"

Thomas Kostigen's Ethics Monitor. Wow. I mean it.

Here in America, we do not believe in over-regulating things, and that is usually good. At lest it is sometimes good. I guess. Politicians can and do botch things up, doing more ill than good, even in instances when there is clearly a problem needing some kind of action.

A quote from Mr. Kostigen's article: "A major insider-trading case involving three hedge funds and several Wall Street firms came to light last week. Other cases of hedge-fund fraud have popped up in Denver, Greenwich, Conn., and a slew of other places around the country." In the first case cited, brokers, including one with compliance responsibilities, were taking money to illegally provide tradable information to the hedge funds in question. Cosy. From all the stories of bad actors running amok at hedge funds one could wrongly, but reasonably infer that most hedge funds are disasters waiting to happen, staffed by rogues and scoundrels who, if they cannot invest well enough to achieve their lofty investment goals, will try to hotwire the markets to get them to behave as they wish. Now I know, well, believe that it is not that bad. in reality only some of the hedge fund folks are that way. But the stories just don't seem to stop.

I want the cleanest markets we can get. I am against peddlers of so-called investments who take people's money and speculate with it or steal it. If the hedge fund industry can come up with a functional way to stop the scandals I am for it. Failing that, regulate away.

Thursday, March 08, 2007

Please, Read Financial Publications and Websites Critically!

That includes this blog, of course.

This morning, in one publication I follow (the excellent Financial Times in this instance,) I saw the blurb on the front page: "How Long will markets be able to defy gravity?" in reference to Martin Wolf's column. Now, I ask you: Is it within the realm of possibility that an outright agenda is reflected there, or what? Mr. Wolf has recently written columns advocating greater progresivity of income taxes in the US (boo on that idea), more international cooperation to tax people in such a way as to preclude them fleeing to tax havens (boo on that also), and reconstruction of the welfare state in the USA (boo, pbbbbht, hiss on that) so, upon looking at a few columns, we see something more of the mindset of the author. Apparently another statist European, who views personal income as the rightful property of the great and wise state, if it only has the resolve to tax it away and do many great and fine things with it, like buy votes.

The problem is that taxation changes taxpayer behavior. They try to cope, lawfully, let's hope! If you tax dividends at a higher rate than capital gains, corporations will pay out less of their profits in dividends. If you raise the taxes on higher incomes, then people will go into the perilous woods of tax shelter forest, and the tax shelter wolves may get them. in other words people will invest to minimize taxes instead of growing their money. Bad situation. To borrow someone's wise illustration, (sorry, I don't have the citation), if Uncle Sam were to tax 100 percent of the money I make every Friday, I would not go in to work on Fridays. Would you? If he only taxes away fifteen percent of what I make on Mondays and Tuesdays, I will go in to the office on those days! If Wednesdays' earnings are taxed at twenty five percent, I will sigh, but hey, I need the money. On Thursdays the tax is thirty percent. I grumble. I probably still go in. I need the money. I would suggest that in Euroland they are taxing Fridays heavily so people are working the other days, and the economies have lower growth.

A cynical comment I once heard, and I do not have the attribution: The problem with popular democracy is that at some point the mob (rabble sounds so undemocratic) may discover that they can vote themselves the contents of the public treasury. Couple that with an attitude that what is yours can be taxed away from you and placed in the public treasury first, and Karl Marx himself would stand up and cheer.

Amen, sister, II: Bloomberg's Baum has a few more apt words on China

I concur: "China's stock exchange has more in common with a casino than a marketplace." More, "China's market lacks transparency and is fueled by rumor and speculation."

A caveat: (she writes:) "Chinese investors have gone back to doing whatever it is they do, which is buy stocks. With increased distance from the events of last week, U.S. investors are starting to look at their own house of cards, not to the roulette wheel that is China's market." Now, I would not refer to the US market as a "house of cards". It isn't. A sad blemish on an otherwise excellent article.

Tuesday, March 06, 2007

So, when is it fair to say that the brokerages and their hedge fund clients are joined at the hip?

The only good side to this situation is that most of the sell-side analysts are just adding negative alpha anyway, so if there are fewer of them and they are mostly giving the fruit of their labors to hedge funds, ...? Will regular folks see better returns? Seriously, I would venture that the actively managed mutual funds worth owning do more of their own research than the rest of them, so they may not so impacted by the big brokerages giving favorable treatment to the hedge funds. So, when will the rest of the mutual funds start pulling their business and giving it to some brokerage which will appreciate it?

When will the clients become cognizant of this? You cannot be a clueless client!

Ben Stein's column, w/ a rather mild critique

The column is titled "Keeping your Cool in a Shaky Market", which is pretty timely and excellent advice in itself. The comments ( I didn't read them all,) are a hoot. Either the commenter is a trader/market timer, and gives Ben's words one star of a possible five, or is more of an investor, and gives four or five stars. There is something to note in this! One commenter calls Ben's counsel "basic stuff". My thought: it is out of sound, dogged, tenacious implementation of good, valid "basic stuff" in investing that you pull ahead. Don't ever hold "basic stuff" in contempt. Ever. You get away from it at your own risk. You don't have to agree with me or with Mr. Stein on all the details. But there are principles which have worked in investing.

Warren Buffett's name is thrown into this melee by one commenter as one who "was smart enough to sell last month when the market was increasing. People will think I'm crazy but you can time the market and the party is over. It's 1929 all over again." Aarrrghh.

Sunday, March 04, 2007

Another Take on China: TCS Daily - "Our Siamese Twin"

You know, I think that over the last week the future for China has been more on my mind than the markets' movement. In a few months this last week will be just noise, probably. In the long run, there are much more important things to think about! It's true. We (the US and China) probably have more interests in common than we have figured out.

The Chinese banking system is a real concern. Much has been written about that. At this stage of my practice, for the foreign component of the portfolio, I don't really like country-specific investing; I want quite a lot of diversification, even now when we have such high correlations. And I want the ability to control value/growth and capitalization size characteristics in foreign holdings. Just my style I guess. You can imagine how I feel about investing in the stocks of individual companies!

But I won't say never on that, or single country ETFs or funds either. To everything there is a season, as has been said. China is getting big, will be very volatile, will have high average growth, if they do not mess it all up. We, mankind, are very prone to that. Some humility is in order. An article I found useful and thought-provoking from TCS Daily....